NEW YORK (Reuters) - Countrywide Financial Corp (CFC.N) on Wednesday received a $2 billion injection from Bank of America Corp (BAC.N), helping the largest U.S. mortgage lender shore up its finances as it struggles with a liquidity crunch.I do see Bank of America's move as a vote of confidence in Countrywide(My mortgage company BTW). That and the recent fed rate cut should be seen as positive news for the markets short-term.
Bank of America, the second-largest U.S. bank, said it bought non-voting preferred stock that yields 7.25 percent and can be converted into Countrywide common stock at $18 per share, 17.5 percent below the shares' Wednesday closing price. Countrywide shares soared 20 percent in after-hours trading.
"It's a $2 billion vote of confidence from a major financial institution," said Steve Persky, a portfolio manager at Dalton Investments in Los Angeles. "Are we out of the woods yet in the mortgage market? No."
Sean Egan, managing director of independent credit rating firm Egan-Jones Ratings Co, said the investment "is a large positive in the sense that it bolsters confidence and enhances liquidity."
"However, based on recent results at other mortgage firms, Countrywide will probably need some additional capital to plug the hole," he added. "Countrywide is going to have to shrink its business. Its wings have been clipped."
The investment came six days after Countrywide stunned investors by tapping an entire $11.5 billion credit line because it was having difficulty selling short-term debt.
That doesn't mean the recent turbulence in the Dow Jones is over. There are too many people sitting on property that is 1- Overinflated in value and 2) An increasing amount of people defaulting on their mortgage. Take instance the first. The wife and I bought our home in 1998. We paid 98,000 for it. A recent appraisal in 2006 put its value at about 250,000. That's an over 250% increase in eight years. If I tried selling the house, I doubt we'd get 250,000 at present. The good news is, we aren't moving and the equity in my house is far greater than the balance on my mortgage.
Floridians(and people elsewhere) who bought at a late point in the housing boom, are finding themselves in a squeeze. In the Sunshine state, homeowner's insurance has skyrocketed. In the same time frame I mentioned for the value of my home, yearly insurance premiums have gone from $960 to almost $4 ,800. I have friends who live east of I-95, but not in a flood area. Their premiums are now $7,000. They may have to sell their home as a result.
As to those who bought in late and could be overextended aka in danger of default one day, I fear for my sister-in-law. She bought a townhoue in Miramar two years ago. I do her taxes every year, and she is paying huge amounts in mortgage interest. Will she fall victim too?
Bottom line- Both homeowners and mortgage lenders still have rough times ahead and that means the Stock Market is in for the same also.
Linked to- Conservative Thoughts, Dumb Ox, Right Wing Nation,